It is every donor’s nightmare that recipient governments end up spending aid on things that it was not intended for. The fashionable budget support approach gives up on this nightmare by leaving allocative decisions to recipients and rather concentrating on  strengthening the country institutions that make these decisions. But this does not mean that donors stop worrying about all of this.

new study in the Lancet finds that “DAH to government had a negative and significant effect on domestic government spending on health such that for every US$1 of DAH to government, government health expenditures from domestic resources were reduced by $0·43 (p=0) to $1·14 (p=0).”

In English this means:  When poor countries get money for health spending, this does not increase overall levels of health spending because governments reduce their own spending on health in response. The Lancet study finds that for every dollar donors give to governments to spend on health, governments reduce their own spending on health by between $0.43–1.17. This means that in the most extreme cases governments would reduce their own contribution by even more than the amount that they get from donors.

Such reallocation of health funding is viewed very badly by most donors. The assumption in that such funding is being spent on bad things like tanks, expensive hotels and jewelery.  But in a commentary to the article, three other reasons for such behavior is presented:

  • Governments may compensate for exceptional international generosity to the health sector by reallocating government funding to other sectors;
  • Governments may be anticipating long-term unreliability of international health aid by stalling possible increases of recurrent health expenditure; or
  • Governments may be ‘smoothing’ aid by spreading aid across several years.

The commentary concludes very nicely that while: “crowding out is a real and widespread occurrence, it does not happen in all countries for which international aid for health increases. In countries in which it does take place, it seems to be the result of deliberate policy choices, which have to be reviewed on a case-by-case basis.”

Two things seem clear:

  • Generalizing about the fungibility of aid is perilous. It assumes evil, opportunistic governments in poor countries and ignores the possibility of these decisions being rational and even (incredibly!) developmental.
  • In the long run aid conditionality is an exercise in futility. The only way to ensure allocative efficiency is to increase domestic oversight of the people and institutions that make allocative decisions.

PS. There are also some methodological problems with the Lancet study raised by David Roodman of the CDG. Click here to read more.